Mid-Year 2008: Securities Lawsuit Filings Remain Up

Is litigation stemming from the subprime- and credit crisis-related activity increasing directors’ and officers’ insurance premiums? Despite the steady flow of new securities litigation during the first half of 2008, it may be too soon to answer that question.

Largely as a result of the subprime- and credit crisis-related litigation, the number of new securities class action lawsuits filed during the first half of 2008 was nearly 50 percent higher than the number of new securities lawsuits filed in the first six months of 2007.

There were 104 new securities class action lawsuits filed between Jan. 1, 2008, and June 30, 2008, compared with only 69 new securities lawsuits during the first six months of 2007.

The 203 filings during the 12-month period from July 1, 2007, to June 30, 2008, is about 15 percent higher than the 176 class securities lawsuit filings for the full year 2007, and the 203 filings also represents a 65 percent increase compared to the 123 filings during the 12-month period between July 1, 2006, through June 30, 2007.

The 203 lawsuit securities lawsuit filings during the 12-month period ending June 30, 2008, is the highest 12-month total since the period July 2004 through June 2005, when 228 lawsuits were filed.

The most significant factor in the elevated securities filing activity was the number of new lawsuits associated with the subprime and credit-related crisis. Fifty-eight of the first-half filings, or about 55 percent, of the first half securities lawsuit filings were subprime- or credit crisis-related. Only 46 of the 103 first-half securities lawsuit filings were not subprime- or credit crisis-related, meaning that the credit crisis-related litigation unquestionably was a driving factor in the elevated securities lawsuit filings levels in the first half of 2008.

The subprime and credit crisis filings show no sign of abating. Of the 58 credit crisis-related lawsuits filed in the first half of 2008, 28 — or almost 50 percent — were filed in the second quarter, including 10 in June 2008 alone. That continued steady filing level suggests that the subprime and credit crisis-related litigation wave will continue during the second half of 2008.

Although the companies named in securities lawsuits during the first half of 2008 were drawn from 56 different categories in the U.S. Department of Commerce’s Standard Industrial Classification index, fully 60 of the first half-lawsuits (or roughly 58 percent of the first half filings) were filed against companies in the 6000 SIC Code series (Finance Insurance and Real Estate). No other SIC Code category outside the 6000 series had more than three lawsuits.

Those statistics underscore an important point about the subprime and credit crisis-related litigation. That is, the subprime litigation wave really has not spread beyond the financial sector.

One consequence of the predominance of subprime- and credit crisis-related litigation is that many of the first half lawsuits have involved nontraditional plaintiffs and defendants. The traditional securities lawsuit involves a securities class action lawsuit brought by public company shareholders against the company and its directors and officers.

But many of the first half lawsuits involve plaintiffs other than public company shareholders. For example, among the first half filings were 17 auction rate securities lawsuits, in which the plaintiffs were not company shareholders, but rather were auction rate securities investors who were suing broker dealers or other financial institutions that sold them the instruments.

Similarly, the credit crisis-related litigation wave also hit a number of nontraditional defendants. Rather than just targeting public companies and company officials, the plaintiffs in many of those lawsuits targeted, for example, hedge funds and mutual funds.

The breadth of the credit crisis also has drawn participants from the larger global economy into the subprime litigation wave. Companies domiciled outside the United States were sued in 19 of the first half 2008 securities lawsuit filings, representing 12 different countries, including four each from Canada and from Switzerland.

The lawsuits filed against domestic companies include corporate defendants from 27 different states, with the largest number from New York (22) and California (11).

The first half 2008 securities lawsuits were filed in 26 different U.S. district courts, but by far the largest number were filed in the Southern District of New York, where 42 (or about 41 percent) of the 103 lawsuits were filed. Other courts with a significant number of lawsuit filings included the District of Massachusetts (10), the Northern District of Illinois (eight), the Central District of California (five) and the Northern District of California (five lawsuits).

It might well be assumed that the elevated level of litigation activity is putting pressure on D&O liability insurance carriers and causing an increase in D&O insurance premiums. However, except in the financial institutions sector, the subprime and credit crisis litigation wave is not significantly affecting pricing or terms and conditions.

As noted, the subprime litigation wave has been largely concentrated in the financial sector. In addition, a significant percentage of the litigation has involved nontraditional litigants, rather than the more traditional public company defendants. For that reason, most public companies, particularly those outside the financial sector, continue to enjoy ample capacity and relatively advantageous D&O coverage terms and conditions.

However, the subprime and credit crisis continues to unfold and the litigation continues to roll in. It remains to be seen how significant the ultimate impact will be. If the litigation produces significant enough losses, particularly if it spreads beyond the financial sector alone, the litigation could ultimately affect the larger D&O marketplace.